Arnold Kling  

Ken Rogoff Interview

Inequality in Life Spans... Policy All the Way Down...

Doug Clement interviews Ken Rogoff. Rogoff says,

I've taught for years in my class that many types of money funds and asset classes outside the traditional regulatory system are subject to the same kind of runs as the conventional banking system. I have had my classes write papers about whether the government can credibly promise not to bail out money funds, and if it cannot, then should they be subject to more regulation? This is not a simple question, but researchers need to provide better answers.

Read the whole interview. Rogoff knows far more about the topic of financial crises than just about anyone I can think of.

Another point he makes is that it is characteristic of financial crises that governments spend a lot of money cleaning up the damage. Why is this the case? Some possibilities:

1. We don't call it a financial crisis unless there is a big clean-up. So, if we didn't do a big clean-up after the Dotcom crash, then it was not a crisis.

2. There is strong interdependence between government and the financial sector. See my 8th lecture on macroeconomics. This means that banks are bound to have political influence, and they are likely to be bailed out in a crisis.

3. It really is good public policy to bail out banks. You really do help Main Street by saving Wall Street.

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COMMENTS (3 to date)
MattYoung writes:

The key link between government and banks possibly comes from their key roles in managing transportation of goods and people.

If so, then when transportation is way off of expectations, we would have many of us waiting for government action on transportation.

The Great Depression, I think, may have been a railroad government facing an automobile demand. The change in transportation structure forced by information shocks.

Alex J. writes:

It's possible that the political imperative to Do Something big (e.g. Bernanke's agressive experimenting) is almost always stronger than the case for doing something at most small based on sober calculations and honest admission of ignorance. If that's the case, the banks don't need enough political clout to bring about a bailout from nothing. They just need enough to make the case that the Something should be a bank bailout.

Andy writes:

I think he said that the increase in debt comes from automatic stabilizers, increased government spending, and particularly lower tax revenue more than directly from bank bailouts...

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